Construction Industry Scheme (CIS) – are you getting it right?
Construction Industry Scheme (CIS) – are you getting it right?
The CIS (in various formats) has been in place in the UK since 1971 and was introduced to tackle tax avoidance and regularise the processes for contractors and subcontractors. The latest iteration has been in place for over 16 years (since 6 April 2007). A number of changes have been made over the years, including some major changes in April 2021. Below we highlight those changes and explain HMRC’s current approach to enforcement.
What is CIS?
The CIS is a tax deduction scheme which covers any ‘construction operations’ undertaken by any entity in the UK (and Northern Ireland) including the UK territorial waters. Construction operations means any construction contract that includes construction work such as demolition, site preparation, alterations, dismantling, construction and repairs.
Who does it apply to?
Any business or entity (a contractor) that pays any other business or entity (subcontractor) to undertake construction work in the UK (and NI), including the UK territorial waters. An entity can be both a contractor and subcontractor if it makes construction payments and receives construction payments. CIS applies to overseas entities as well as those in the UK.
What is a contractor?
There are two types of contractor:
1. Mainstream contractors:
Businesses and entities that carry on a trade of construction, eg construction companies, building firms etc. must operate CIS.
2. Deemed contractors
Up to 5 April 2021, businesses (those not in mainstream construction) had to register when their average annual expenditure over a 3-year period (based on their accounting period) exceeded £1m. However, since 6 April 2021, businesses must test their spend on construction operations over a rolling 12-month period i.e. it is a day-to-day test. As soon as this exceeds £3m, they must register for and operate CIS on any new contract – until the rolling annual average spend drops below £3m when they can de-register.
HMRC does recognise the significant change this can have on businesses so can provide a small grace period in which to set up processes for implementation of the scheme. But this grace period is discretionary, therefore, it is important to monitor expenditure regularly and liaise with HMRC early.
An exemption from the need to register under the deemed contractor rules can be claimed if expenditure on construction relates to property used for the purposes of your business itself (e.g. work on your main business premises). HMRC has toughened its interpretation of this exemption so if you are relying on it, it is wise to review the position in detail at regular intervals.
Deemed contractors and Interaction with VAT
For more than a year there had been a lack of clarity on whether or not VAT should be considered, when assessing whether payments are above the £3m threshold for registering. This had been caused by HMRC’s manuals stating ‘When assessing the deemed contractor threshold HMRC looks at the person’s expenditure on construction operations included in the contract payment. For example, if VAT is included in the contract price, it is included in the assessment for whether the deemed contractor threshold has been exceeded.’
After HMRC was challenged on this point, it updated its manuals in June 2022 to state the complete opposite; the guidance now reads ‘When assessing the deemed contractor threshold HMRC looks at the person’s expenditure on construction operations included in the contract payment. For these purposes, the term ‘expenditure’ means expenditure excluding VAT, that is before the application of VAT. For example, if the contract price is £1 million + VAT the expenditure figure to be taken into account for the purpose of the test is £1 million.’
Tackling Fraud – HMRC powers and changes
Companies that are subject to CIS deductions are able to claim relief for the deductions suffered against their PAYE and National Insurance Contributions (NIC) payments via submission of an Employer Payment Summary (EPS).
1. From April 2021
HMRC increased its powers from April 2021 to enable it to amend an EPS where it has evidence that the CIS deductions to be set off are not correct. Incorrect claims can arise from:
- Businesses not operating within the CIS
- Subcontractors not being a company (note only companies can claim offsets against PAYE and NIC)
- Deductions not actually having been suffered
- Overstated claims.
Any amendments made that result in additional tax and NIC, can attract interest and penalties so it is important to ensure the above four points are met.
2. From April 2022
A company has been required to includes its Corporation Tax Unique Taxpayer Reference (UTR) on the EPS to verify that it is a company. Failure to do so will result in the request for CIS deductions being rejected and the company will need to re-submit the EPS.
HMRC hopes that these new powers and obligations for companies will result in collection of an extra £20m tax in each of 2022/23 and 2023/24 and a further £15m in 2024/25.
HMRC continues to challenge contractors who allow subcontractors (who are subject to CIS deductions) to claim large materials figures (which are exempt from CIS deductions) without sufficient evidence to support them.
The rules concerning qualifying materials changed from 6 April 2021, and now make clear that only the actual cost of materials incurred directly by the subcontractor being paid qualify. This marks a change from the historic position where subcontractors were frequently claiming materials costs incurred by subcontractors further down the contractual chain.
In view of this rule change, we recommend that contractors ensure that processes are in place to gather sufficient evidence of materials claims from subcontractors before treating them as exempt, otherwise they risk HMRC pursuing them for additional CIS deductions in future.
VAT reverse charge
From 1 March 2021, the Domestic VAT Reverse Charge for construction services took effect; contractors should consider their obligations when making VAT-able supplies in the UK. Read more.
HMRC published a consultation document on possible changes to strengthen and simplify the CIS. The conclusion of the consultation was published on 22 November 2023 as part of the Autumn Statement which resulted in the following changes and draft legislation being introduced in respect of:
- VAT compliance will be included in the statutory compliance obligations for subcontractors applying for and maintaining gross payment status (GPS) from 6 April 2024. For those who apply for and obtain GPS on or after its commencement, HMRC would look at the 12 months preceding the application, which if it includes a pre commencement period, could be problematic. For those who already hold GPS, compliance or otherwise with VAT obligations will only apply from 6 April 2024 onwards.
- The government is extending the ability of HMRC to immediately cancel GPS if it has reasonable grounds to suspect that the holder has fraudulently provided an incorrect return or incorrect information in respect of its VAT, Corporation Tax Self-Assessment (CTSA), Income Tax Self-Assessment (ITSA) and PAYE.
- Further changes are to be introduced to remove the majority of payments from landlords to tenants from the scope of CIS. This will result in subcontractor registrations not being required. Further details are to be published on this complicated area.
- Other changes are being introduced, such as the reduction from 12 months to 6 months for the review following GPS being granted, and the move to digital applications for CIS registrations.
- Lastly, group reporting, similar to VAT, has also been considered but as HMRC needs to work closely with stakeholders for an IT solution, this is not likely to be progressed before 6 April 2024.
- The exceptions to VAT compliance obligations to ensure that GPS is not refused or removed for minor errors, and
- Exempting certain payments from landlords to tenants from the scope of the CIS completely under an extension to Regulation 24 (the Charities exemption) which replaces Regulation 20 (the Reverse Premium exemption).
We have not looked at what types of works fall within construction operations but for businesses incurring regular large amounts on construction projects, it’s vital to monitor the type and quantum of expenditure on a rolling basis and register (or contact HMRC) as soon as it gets to £3m.